So far 2019 has proven to be a mortgage revival as both lenders and consumers are reaping the rewards of favorable economic conditions. US mortgage rates have dropped to near historic lows pushing up loan demand. And lenders’ profit margin outlook is positive—the first time in almost three years.
According to Fannie Mae’s Q2 2019 Mortgage Lender Sentiment Survey, lenders’ net profit margin outlook tracked its second highest most positive result in its six-year history with a 29% net increase for those surveyed in Q2.
The last time a survey showed a net increase in outlook was Q3 2016 with 11%.
"Lenders are signaling strong demand-driven mortgage market dynamics, with optimism for both their consumer demand and profitability outlooks reaching multi-year highs," said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. “A lift in lender sentiment from depressed levels is an encouraging sign; however, many challenges remain, including the continued shortage of entry-level housing. In addition, it appears that the meaningful easing of lending standards is a thing of the past."
For the survey, 234 senior lending executives answered online questions about current their impressions of the mortgage industry and their thoughts on the future. The executives represented small, medium, and large institutions from mortgage banks, depository institutions, and credit unions.
Questions were asked across three loan types:
GSE-Eligible: mortgages meeting the guidelines of the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
Non-GSE-Eligible: mortgages that do not meet the GSE guidelines for purchase.
Government: mortgages including Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) insured loans, but also includes other programs such as Rural Housing Guaranteed and Direct loans.
Driving Consumer Demand
Consumer demand is overwhelmingly the main driver for those with positive profit predictions, grabbing a 64% share of respondents. By contrast, those who forecasted decreased future profit margins ranked competition from other lenders (59%) as their most important reason for a negative outlook.
Consumer demand is up for both purchase and refinance mortgages, according to the survey. For instance, for non-GSE purchase mortgages, lenders reported growth that was higher than any quarter since Q2 2016. And after nine consecutive months of negative demand across all loan types, the net share of lenders reporting growth in Q2 was positive.
Helping fuel the increased demand is lowering interest rates, which have seen a gradual decrease over the last eight months. A 30-year fixed rate is currently 3.84% and has been declining since the 7-year high of nearly 5% in November 2018. For example, the difference between these two rates represents a $200 a month savings on a mortgage payment for a $300,000 home making more people potentially eligible for the same loan amount.
Other factors that are driving demand according to the survey are:
- Economic conditions (e.g. employment) overall are favorable It is easy to qualify for a mortgage
- There are many homes available on the market
- Home prices are low
Besides increased consumer demand respondents who are optimistic about their profit margins say that operational efficiency (i.e. technology) was the second most important factor. The other factors are represented in the graph below.
Decreased Easing of Credit Standards
Lenders aren’t as confident in the easing of credit standards as the pace overall has trended down. For GSE-eligible and government loans, the “net easing share declined to the lowest levels since 2014.” However, despite the slow down, there’s still an overall net positive of lenders who think credit standards will continue to ease—just not at the same rates.
When asked what drove the loosening in credit standards for approving loan applications for the last three months, lenders’ answers fell into three primary buckets:
- Changes to guidelines
- Market conditions
- Portfolio/strategic changes
One lender at a large institution said, “We introduced a non-QM [qualified mortgage] that made borrowers more eligible. Another said, “Changes in GSE qualifications, [and] better-prepared borrowers” helped drive their loosening of standards.
In general, the majority of lenders (61%) feel it’s easy to get a home mortgage today. This percentage dovetails with the attitudes of consumers (59%).
Short Supply Equals Increased Prices
Despite the largely good news from the survey, there are some challenges ahead for both lenders and home buyers. When asked whether home prices would go up or down over the next 12 months, 48% said they would go up versus only 8% who said they would drop. Forty-three percent said prices would remain unchanged.
Additionally, lenders who said demand for homes would go down over the next three months, cited the high price and unavailability of homes as the two primary reasons. “Low inventory especially in the first-time homebuyer price range,” noted one lender.
Indeed, the average price of homes grew 4.8% in May, the largest increase since August of 2018. There’s also only a 4.3-month supply of homes—a 6-month supply is considered a balanced market. When the supply falls below the six months, home prices rise because the supply is not able to meet the demand. Sellers have the upper hand.
Loan App Volume Remains Steady
Lastly, another indicator of the industry’s relative health is the volume of mortgage loan applications. It’s been largely increasing this year with big jumps at the end of March (19%) and another recently in the first week of June (27%).
"Purchase applications decreased more than 3 percent last week, but were still up almost 4 percent from last year. Strong demand from first-time buyers and low unemployment continue to push this year's purchase activity above a year ago,” said Joel Kan, MBA's (Mortgage Bankers Association) Associate Vice President of Economic and Industry Forecasting.
Most signs point to a positive remainder of 2019 for both mortgage lenders and consumers. The big “if”, of course, is always the economy’s overall health and that appears healthy at least for the next six months.
All images courtesy of Fannie Mae.